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Investing in Climate Failure
The Ethics and Economics of Fossil Fuel Divestment
By Alex Lenferna - alexlenferna@gmail.com
University of Washington Philosophy Department
There is a concise article-length, more up-to-date version of this paper here: http://bit.ly/AMoralEndowment
Also this paper is gradually being expanded into a book length treatment which should be finished by mid-to-late 2015. The work in progress can be accessed at: http://bit.ly/investinginclimatefailure I have also written a report on the financial case for divestment here: http://bit.ly/DivestSCERS
Please share and distribute freely.
In response to the unfurling crisis of anthropogenic climate change and/or global warming increasing numbers of people are pushing institutions, such as universities, city governments and religious institutions, to freeze any new investment in fossil-fuel companies, and divest from both direct ownership and any commingled funds that include fossil-fuel public equities and corporate bonds. The oft stated aim of doing so is to prevent continued participation in, profiting off, and implicit support of the fossil fuel industry, which, the growing divestment movement argues, consists of many of the most prominent and morally culpable actors driving the climate crisis. Increasingly the divestment movement is also arguing that divestment from fossil fuels is not only morally laudable, but also a financially sound investment decision. Through both arguments the fossil fuel divestment movement - the fastest growing divestment movement in history
- has been shedding light on one of the most difficult contradictions of our time, the contradiction between a business-as-usual trajectory and the changes to the global economy required to keep global warming below the internationally agreed upon target of two degrees Celsius above pre-industrial levels. Given that the contradiction between these two paths is so great, and that the financial world has arguably not properly countenanced this, the world of global finance is largely unaligned with a two degree world. It is this contrast between business as usual and climate
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This paper is dedicated to all the brave youth who are fighting for a better future – Mandela’s great generation. Special thanks to Ann Cudd, Stephen Gardiner, John Symons, members of KU Divest, Divest UW, and the Fossil Fuel Divestment movement at large for very useful comments and discussions on this issue.
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According to (Ansar et al., 2013) fossil fuel divestment has grown faster than any other divestment movement. The movement currently stands at over 500 divestment groups at universities, cities, and religious institutions across Europe, North America, Australia and New Zealand, with 11 cities already committed to divesting as well as a number of universities and religious institution according to figures on gofossilfree.org and http://www.truth-
out.org/opinion/item/20092-in-the-wake-of-haiyan-we-must-divest-from-fossil-fuels
2 failure on one end of the spectrum, or climate victory and a revolution in our energy systems on the other, that the divestment movement has shed light on and which it is asking its institutions to address by bringing their finances more in line with what would be required to prevent runaway climate change. Institutions considering whether to heed the divestment movement’s call and divest from fossil fuel companies are faced with a seemingly complex moral and financial choice. In order to unpack the elements of this choice this paper will explore the prospective decision of whether to divest, with particular emphasis on the perspective of a university endowment fund. I draw substantially from the growing financial literature on divestment and the carbon bubble, as well as on rational choice theory, game theory and discussions of the tragedy of the commons, in order to provide both an ethical and economic analysis of what divestment from fossil fuels entails. For the sake of context, moral urgency, brevity, and for reasons I will delve into throughout the paper, I will use the North American coal industry as a case study for divestment, although the arguments can be expanded and applied to divestment from other regions and fossil fuel industries, albeit not as robustly in all cases. In order to attempt to artificially separate the questions of ethics and economics, I provide two separate analyses of the choice faced by universities considering whether to divest. One analysis shall be strictly economic and shall assume that university endowment funds can be legitimately considered to be driven solely by the pursuit of profit. I conclude that even on this limited analysis divestment from at least part of the fossil fuel industry can be a financially sound investment decision. The second part of the analysis will focus on the university endowment as an institution answerable to the dictates of morality, and will argue that if we see an endowment as such that the university has a moral responsibility to divest in order to ensure its integrity as an institution, show moral leadership, and prevent harm caused as a result of its investment policies. Having provided these two separate analyses I will then argue against the legitimacy of viewing a university and its endowment according to the first analysis, as solely bound by the dictates of pursuing profit. I will argue that the second way of viewing a university endowment as a morally bound institution is the morally sound and socially acceptable way for a university to function. This argument is based on two premises, the first being the profound role that a university and its financial institutions play in broader society and, secondly, how their investment policies and the effects thereof cannot justifiably be seen to be removed from the broader aims and goals of the university and as unanswerable to the call of ethics and morality. Based on these premises I conclude that universities aiming to act with integrity, leadership and moral fortitude should divest. The ethics argument may seem somewhat
3 superfluous given that according to my economic analysis universities aiming to act on economic grounds alone should divest. However, the ethical argument may provide a case for a more aggressive and robust form of divestment, one characterised by moral leadership rather than the more limited case for divestment entailed by simply responding to the financial risks posed by the carbon bubble.
Divestment Nuances and ‘King Coal’
Many divestment groups are calling for divestment from the fossil fuel industry at large, with a focus on the Top 200 Companies according to the amount of carbon reserves that they hold. While this way of approaching the carbon bubble makes for simple definitions of targets for divestment, it only distinguishes the quantity of the reserves, not the quality of those reserves. Distinguishing the quality of reserves is arguably quite important, for not all fossil fuels are equal. Indeed, some fossil fuels, such as coal and oils sands, are much more harmful and capital- and carbon-intensive than other forms of fossil fuels. This has implications not only for the ethical problematicity of those fossil fuels, but furthermore reflects how they will be affected by the carbon bubble. As Generation Foundation highlights, “In the hierarchy of fossil fuel asset stranding, it is reasonable to assume that in carbon-constrained scenarios, the projects with the highest break even costs and emissions profile
(e.g. oil sands and coal)
will be stranded first” (Generation Foundation, 2013, p. 18). Consider, for instance, that the ratings agency Standard and Poor’s recently concluded that the business models of tar and/or oil sands could be “invalidated” in a world acting to constrain carbon (Redmond & Wilkins, 2013).
What is interesting here, is that once we recognise these nuances the ethics and economics of the carbon bubble align to a certain extent, insofar as the most damaging and capital intensive fossil fuels are those most at risk of becoming stranded. Reflecting this more nuanced approach, companies like AMP Capital are targeting companies that derive more than 20 per cent of their earnings from thermal coal, coal-fired power generation, oil sands and the conversion of coal to liquid fuels (Ker, 2014). The fossil fuel divestment campaign at the University of Washington is pushing for divestment along the lines of AMP Capital, while also pushing the treasury to screen out the broader portfolio using a carbon risk assessment tool. Similarly, in an attempt to pay heed to these complexities, in this analysis I will take coal as the paradigmatic example of what we need
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Interestingly a recent report by the Carbon Tracker Initiative, which highlights the importance of the Keystone XL pipeline for the expansion of the tar sands industry, concludes that “absent a material expansion in Alberta’s export capacity over the rest of this decade the commercial viability not only of planned new oil- sands projects but also of existing plays will become increasingly questionable, with most new projects simply unviable and existing plays at risk of having to shut in a growing share of their production” (Carbon Tracker Initiative, 2013a, p. 1).